The Price Is Right - or Is It?

Anyone hunting for a health club would be surprised to find a membership deal that includes a free massage after every workout; they would also be surprised to find one that charges five bucks for a hot shower. That's because health clubs offer a fairly standard set of services; customers know which ones are typically covered by a monthly fee and which ones are luxurious extras. Unfortunately, customers of application service providers (ASPs) can't be quite so certain about what they should get for their money. And if they aren't careful when they shop around for an ASP, they could wind up with the equivalent of a cold-water spigot and a Bic lighter when they're expecting a steamy-hot, relaxing spray.

The sad truth is there aren't any standards for ASP pricing-or, more precisely, for what services are included in the ASP's monthly fee. "The rule of thumb in this area is 'if you've seen one, you've seen one,'" says Scott Killingsworth, cochair of the intellectual property and technology practice at Powell, Goldstein, Frazer & Murphy, a law firm based in Atlanta. In some ways, the lack of such standards is not a surprise; the ASP business model-renting software functionality over the Internet or a private network-represents a fairly recent twist in traditional technology outsourcing. Nonetheless, pricing is still a headache for any business executive who needs to figure out what's covered in an ASP's deal, what's not, what the missing pieces will cost-and how that all compares with a deal offered by another ASP. "You go to an ASP because you don't have the expertise," explains Brad McGee, senior vice president at Tyco International, who has had to wrestle with the ASP pricing problem. Ironically, "to figure out what your numbers are going to be, you need this expertise," he says.

Here's what happened at Tyco International Ltd., a $28 billion diversified manufacturer based in Exeter, N.H. One of the company's smaller divisions was seeking a provider to host enterprise resource planning software from SAP AG, McGee says. Some providers quoted fees that didn't cover costs for telecommunications services, which would be needed to connect Tyco's offices and remote users to the providers' data centers. Some didn't cover new hardware on Tyco's end or subsequent software upgrades. Clearly, there's nothing superfluous about these items. But the fact that such items weren't included in the price meant Tyco would have to do a lot more homework to figure out the true cost of using an ASP. Ultimately, Tyco chose HostLogic Inc., an ASP in Boca Raton, Fla., that included costs for all three-telecommunications, hardware and upgrades-plus those for software customization and support in a flat, monthly, per-user fee. "You don't want to be surprised that the cost per seat of an ASP turns out to be 50 percent of the total implementation cost," McGee says. (McGee declined to reveal the per-user fee offered by HostLogic, which at this writing was just finishing up Tyco's implementation.) Given the differences as to what is included and what isn't, ASPs' per-user quotes can vary widely for the same application, says Dean Davison, a vice president at technology consultancy Meta Group Inc. in Los Angeles. SAP implementations from established ASPs can run from $350 to $800 a month per user, he says. And not all ASPs charge per user. Some charge per transaction or based on server activity, Killingsworth notes; transaction or activity fees can be charged based on time, as a flat rate or as a percentage of the deal. Customers can negotiate discounts for committing to do a certain number of transactions; fees can be tiered as the application usage grows. With all the complexity around understanding pricing-and comparing pricing among ASPs-customers sometimes forget about the high switching costs to change ASPs a few years down the road, Killingsworth says, and they neglect to lock in pricing for contract renewals. "This gives an ASP a license to gouge," he says.

Beyond pricing, there's the question of what level of service an ASP provides for the price. What application availability does it promise? What is the frequency of application patch-ups? How much expertise does it have running the application in question? How responsive is it to support problems? "This is a long-term agreement," Davison says. "[Customers need] to understand how the vendor is going to react and respond and deal with problems two years from now, things we can't anticipate." Spelling out a strong service-level agreement can help protect a company against future performance problems. Checking customer references can also help companies spot any potential problem areas. (But don't expect to get much information about pricing, however; Killingsworth says that many ASPs ask their clients to sign confidentiality agreements so that they won't disclose pricing.) Asking a few key questions of the ASPs themselves will help you compare their offerings, says Meredith Whalen, program manager of ASP and Internet services at International Data Corp., a Framingham, Mass.-based market research company (and sister company to Darwin's publisher, CXO Media). Here are some she recommends:

- Does the ASP need to rely on any outside partners to deliver its services? If so, find out how tight the partnerships are and whether there is room for finger pointing if something goes wrong.

- What kind of expertise does the ASP have in running the application you plan to rent? Can it integrate the application with your existing systems?

- How many dedicated employees does the ASP have? How many are devoted to running the application, security and network operations?

- How many data centers does the ASP have? Where are they? What physical and network security measures are in place to protect your company's data?

- How extensive is customer support What kind of questions will it handle? When is it available?

- What happens if you want to terminate your agreement with the ASP? Could you take the application back in-house or move it to another ASP? Are there any penalties for doing so?

- Customers who are fed up with these pricing and service level conundrums may find some relief in the future. Traver Gruen-Kennedy, chair of the ASP Industry Consortium in Wakefield, Mass., and director of Internet working strategy at Citrix Systems Inc. in Fort Lauderdale, Fla., is a strong proponent of ASP certification-that is, having an outside third party assess an ASP's security methodology, application availability and performance according to a service-level agreement. Ernst & Young, for example, offers a CyberProcess Certification program, which audits e-commerce site providers for security and availability. USinternetworking Inc. is one ASP that has received Ernst & Young LLP's seal of approval. Meanwhile, Gruen-Kennedy says his group is working to foster a set of global standard practices for the industry, something akin to the ISO 9000 quality standards. The group has a document coming out about service-level agreements and what should be included in them, he says; it is due out around the time of Comdex, the giant computer-industry trade show held in November in Las Vegas. Gruen-Kennedy is eager to see the standards effort succeed-and anyone whose ever tried to negotiate an ASP deal would no doubt share his views.

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